On 21 May 2019, HMRC published updated paragraphs CG64050 and CG64051 of its Capital Gains Manual, which provide guidance on the economic interest requirement, introduced by Finance Act 2019, for a shareholder who wishes to claim entrepreneurs’ relief on a disposal of shares in a personal company on or after 29 October 2018. Section 39 of and Schedule 16, Finance Act 2019, amended section 169S(3) to impose the following two additional conditions, at least one of which must be satisfied:
The shareholding would entitle the individual to at least 5% of the profits available for distribution and at least 5% of the profits available on a winding up.
The individual would be entitled to at least 5% of the proceeds of a disposal of the whole of the ordinary share capital of the company.
The second condition was introduced to assist shareholders in companies with complex share capital structures but is subject to anti-avoidance provisions.
HMRC’s guidance and examples in paragraph CG64051 clarify how, and at what date, the valuation of the company and the individual’s entitlement to notional proceeds are determined. For the purposes of condition 1, the entitlement to profits and assets is calculated largely in accordance with Chapter 6, Part 5, Corporation Tax Act 2010. For condition 2, the company is valued at the date on which the individual’s actual disposal occurs, but without a discount for a minority holding, and the amount apportioned to the individual is then used to measure whether the criteria have been met throughout the relevant period.